Workplace Finances

Employer-Sponsored Retirement Plans

Ready to test your knowledge? You'll have ten multiple choice questions to answer. Click on each question to reveal the question and multiple choice answers. After you've completed answering all ten questions, click "Grade Me!" at the end of the quiz to see how you did.

Question 1

If you're eligible to participate in a 403(b) plan instead of a 401(k) plan at work you're likely an employee of?

(A) A public school system.

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(B) A church or synagogue.

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(C) A non-profit hospital.

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(D) All of the above.

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According to the Internal Revenue Service (IRS), a 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. For the most part, 403(b) plans work the same way as traditional 401(k) plans. Their respective names refer only to the section of the tax code that describe these plans.

Question 2

The term "401(k)" comes from?

(A) The section of the Internal Revenue Service tax code that outlines it.

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(B) The maximum amount of income you can have and still contribute ($401,000).

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(C) The amount of revenue your employer must earn ($401,000) before offering a plan to employees.

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(D) The amount ($401) you can contribute monthly to the plan.

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The "401(k)" designation comes from the section of the Internal Revenue Service tax code that authorizes and describes this particular defined contribution retirement plan. This section of the IRS tax code was enacted into law in 1978 in order to allow taxpayers a break on taxes for deferred income.

Question 3

If you have money invested in a 401(k) plan at one employer and change jobs which of the following can you do with your account balance?

(A) Move it into a 401(k) plan offered by your new employer.

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(B) Deposit it into an IRA account.

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(C) Leave it in your previous employer's plan.

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(D) All of the above.

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When you start a new job, there are several options you can consider for handling your 401(k) account balance with your prior employer. Your first option is to just leave the funds with your ex-employer. You can also choose to ´rollover´ your 401(k) into the 401(k) plan offered by your new employer or into an Individual Retirement Account, or IRA. In most cases, an IRA would be the recommended option, as you´ll have a wide array of investment options, with minimal fees. The final option would be to cash out from your prior 401(k) account, although you´ll be subject to early withdrawal fees plus ordinary income taxes on the withdrawn amount. You´ll also negatively impact your retirement plans if you take that option.

Question 4

Who is responsible for the investment decisions associated with your 401(k) account balance?

(A) Your employer.

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(B) Your immediate supervisor.

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(C) Your plan administrator.

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(D) You, the plan participant.

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401(k) plans generally provide plan participants with authority over the direction of their investments. Employers, or officers or directors of an employer generally do not have fiduciary duties for your investment decisions, except for determining what investment options are offered by your specific 401(k) plan.

Question 5

Which of the following ARE NOT benefits of participating in a 401(k) retirement plan at work?

(A) To be eligible for potential employer matches to your contributions.

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(B) To allow your savings and investments to grow on a tax-deferred basis.

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(C) To reduce your taxable income.

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(D) Penalty-free withdrawals.

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One of the basic premises of a 401(k) account is to reduce an employee´s taxable income based on the amount contributed into a 401(k) account and to allow those savings to grow on a tax-deferred basis until those funds are withdrawn from the account. Withdrawals made prior to age 59 1/2 are subject to a 10% Federal penalty, as well as being taxable as ordinary income, so 401(k) accounts are not a good home for temporary savings. Also, in order to receive matching contributions from employers, employees must be contributing to their 401(k) accounts.

Question 6

If you have a "vesting schedule" associated with your 401(k) plan, you?

(A) Have a defined schedule as to when all of, or portions of, the employer matched portion of your 401(k) plan becomes yours.

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(B) Have a defined schedule as to when all of, or portions of your 401(k) plan becomes yours.

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(C) Have a defined schedule for the periodic reallocation of your 401(k) account balance into different types of investment options.

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(D) Have a defined schedule for "casual Fridays" written in your dress code.

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Within the framework of a retirement plan, "vesting" means ownership. Within that plan, each employee will own or ´vest´ a percentage of their account each year they are part of the plan. An employee who is fully, or 100% vested owns 100% of their account balance and their employer cannot take those funds back for any reason. An employee´s own contributions to the plan are always 100% vested the moment the contributions are made. Employer contributions may have different vesting requirements, depending on the sponsored plan.

Question 7

401(k) plans are a type of retirement plan otherwise known as?

(A) A defined benefit plan.

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(B) A defined contribution plan.

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(C) A pension contribution plan.

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(D) An employment savings plan.

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Retirement plans in which the employee and/or the employer contribute to the employee´s individual account are Defined Contribution Plans, according to the IRS. The amount in the account at distribution, includes the contributions and investment gains or losses, minus any investment and administrative fees.

Question 8

What age must you reach before you can draw from your 401(k) account without having to pay a penalty?

(A) 55

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(B) 59 1/2

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(C) 65

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(D) 66 1/2

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If you take a distribution from your 401(k) or IRA before you reach 59 1/2 years of age, you´re assessed a 10% penalty tax in addition to any other taxes you owe on the withdrawal, which is treated as ordinary income for taxation purposes. However, there are conditions where withdrawals can be made penalty-free before you reach 59 1/2 years of age. There are some exclusions that exist where you are permitted to withdraw funds without penalty. Examples of those include higher education expenses, first-time home purchase, or paying for unreimbursed medical expenses.

Question 9

When it is a good idea to reallocate your 401(k) investments?

(A) When your time horizon changes for retirement.

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(B) When your investment strategy changes from conservative to aggressive or aggressive to conservative.

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(C) When your allocation becomes out of balance due to growth or a decline in a specific investment type.

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(D) All of the above.

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Asset allocation refers to the way account balances are divided between different asset classes. Most experts recommend that you invest more aggressively when you are further away from retirement and more conservatively as you get closer to retirement. So reallocations make sense as you get older and get closer to retirement, or if your retirement plans change. Experts also recommend that you distribute funds across multiple investments and that you continuously make sure the amounts you have in each type of investment remain in the proper balance.

Question 10

When you contribute to a 401(k) plan at work?

(A) The money is put into investments of your employer's choice.

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(B) The money is held by your employer as an investment in the company you work for.

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(C) You are offered a choice of investments to put your money by the third party administrator selected by your employer to manage the plan.

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(D) The money is invested in US Treasury notes which you can redeem with the Federal government at the time you retire.

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The investment options available within your 401(k) plan will depend on the who your plan provider is and the investment choices they decide to make available. Most 401(k) plans make at least three investment choices available. Some of the more common options include mutual funds, company stock, individual stocks, bonds and other securities, or variable annuities. Choosing the right combination of investments can help maximize the future value of your 401(k) account.

Please note, information and interactive calculators are made available to you as self-help tools for your independent use and are intended for illustrative purposes only. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

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